Chunghwa Telecom Co., Ltd. Q2 2007 Earnings Call Transcript

Sep.16.07 | About: Chunghwa Telecom (CHT)
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Chunghwa Telecom Co., Ltd. (NYSE:CHT)

Q2 2007 Earnings Call

August 30, 2007, 6:00 AM ET

Executives

Tan Ho Chen - Chairman and CEO

Joseph Shieh - CFO and Sr. VP

Dr. Shyue-Ching Lu - President

Analysts

Anand Ramachandran - Citigroup

Danny Chu - Lehman Brothers

Cathy Chan - Goldman Sachs

Elinor Leung - CLSA

John Kim - Merrill Lynch

Presentation

Operator

Good evening, ladies and gentlemen. Welcome to the Chunghwa Telecom Conference Call for the Company's First Half 2007 Operational Result. During the presentation all line will be on listen-only mode. When the briefing is finished, direction for submitting your questions will be given in the question-and-answer session.

Now, I would like to turn it over to Chairman, Ho Chen; the host of the conference. Thank you. Chairman, Ho Chen, please go ahead.

Tan Ho Chen - Chairman and Chief Executive Officer

Thank you, operator. Good evening, everyone. Thank you for your patience. This is Tan Ho Chen, Chairman of Chunghwa Telecom. I would like to thank you for joining our first half and the second quarter 2007 earnings results conference call. In the [ph] call, Dr. Shieh and President Lu, take you through a review of our financial results and the business operations, then I will guide you through our near term strategic outlook. At the end of the presentation, we will be happy to take your questions.

Before we begin, please note our Safe Harbor statements on slide 1.

Next, I will review our Company's first half highlights, before I hand over to Dr. Shieh. On the segmental basis, the Internet and data segment continues to drive revenue growth. We will continue our strategy to migrate ADSL subscribers to higher speed services, including FTTB, Fiber-to-the-Building.

Subscriptions for FTTB have increased substantially over last several quarters. This paves the way for our future, offering more value-added service that required high transmission speed. As the only integrated telecom operator in Taiwan, Chunghwa is best positioned to offer bundled service. We not only provide the bundled services to enterprise customers, but also to residential customers. These bundled services are well received and help strength customers' loyalty.

Our proposal to increase capital through transfer of a certain amount of capital surplus towards capital and reduct... and conduct capital reduction afterwards was approved in the AGM held on June 15th. With this program, shareholders will be distributed NT$9.09 per ADR in cash.

We will continue to explore in methods to improve our capital structure. As a listed company on both the Taiwan and New York Stock Exchange we are strict in the strength on following best practice corporate governance procedures.

This year, in a survey conducted by Commonwealth Magazine regarding Corporate Social Responsibility, Chunghwa was selected as number one major corporation in Taiwan in the Corporate Governance category. Our practice in Corporate Governance also won the CG6002 Certificate by the Corporate Governance Associations in Taiwan and was praised in The Asset Magazine's 2007 Corporate Governance Awards. Chunghwa won a Platinum award, the highest ranking in the category of Telecom Service in 2007 Reader's Digest Asia Trusted Brand. The Company has already been awarded the prize in four consecutive years. We also recognized, as the company, most committed to a Strong Dividend Policies in Asia Best Company Poll 2007 by FinanceAsia.

Now, let me hand out the call over to Dr. Shieh, our CFO to review our financial results. Dr. Shieh, please.

Joseph Shieh - Chief Financial Officer and Senior Vice President

Thank you. Please refer to slide 4. The three-year early retirement program from year 2005 to 2007 has been completed, and the 4,574 employees left the company.

Please note that green part representing salaries and the pension provisions. Before deploying our early retirement program, salaries and the pension provision in 2004 was NT$37.9 billion. However, those are expected to decline significantly to NT$31.6 billion for year 2008. This trend which is expected to continue, best demonstrates the cost savings of early retirement program.

In addition, to salary and pension, ERP compensation and the performance-based bonuses were two major personnel cost items starting in year 2005. The compensation for employees that participated in the ERP was one-time expense during 2005, 2006 and the 2007. Since privatization, we have implemented a new performance-based bonus incentive program. This program is targeted to encourage better performance by employees.

Our new statement of Financial Accounting Standards recording the recognition of employee bonuses and the Director, Supervisor remuneration and expenses will take effect in year 2008. According to the new statement, Company should treat those bonuses as personnel expenses, instead of as a dispersion of earnings. However, we will expect total personnel expenses to decline starting in year 2008, despite this accounting change.

Please turn to slide 5. A capital reduction plan was approved at AGM this year. In light of the plan, we are going to reduce around 9.1% of our total shares outstanding. A trading suspension will start at the end of December this year and end in January, before to cash payment date. Since the cash return is derived from our capital surplus and that is deemed as shareholders' contributions; there is no tax issue in this regard.

Please refer to the right hand side of the slide for the calculation of the reference price following the capital reductions. The Board approve to repurchase 450 million ordinary shares, representing 2.35% of the Company's total shares outstanding. The range of the repurchase price will be from NT$38.36 to NT$85.23 per share. Repurchased shares will be derivatives in the future. We will continue dialogue with the regulator regarding lifting the cap on the transfer of the capital surplus to capital stock. And we will further examine the appropriate timing to conduct share buyback programs and the cancellation of those shares.

Now, let us move on to the financial result for the first half of this year. First, I would like to explain the different US and ROC GAAP accounting treatment following our first half 2007 results. Under US GAAP we set aside 10% for anticipated earnings tax on our anticipated after tax earnings, and recognize the employee bonus, remuneration for directors and supervisors, and a discount for employee stock subscription and expenses. ROC GAAP reporting requirement do not withhold these items. Moreover, compensation for the early retirement program is recognized as a personnel cost under US GAAP while it is characterized as other expenses under ROC GAAP. The different accounting treatments lead to different financial results that would be presented in the following slides. Again, I would like to emphasize that we use ROC GAAP to calculate our dividends.

Review the following along with the slides. I will now move on to slide 7. You can see on the right hand side of the slide, we provide the financial data under ROC GAAP, which we believe to be more relevant to our operations. Under US GAAP, total revenues for first half 2007 were NT$96.43 billion which is a 5.5% increase year-over-year. This was mainly driven by the consolidation of revenues from SENAO and the continued growth in the Internet and data, and the mobile business. SENAO is one of our subsidiaries.

EBITDA for first half '07 increased 6.2% year-over-year to NT$50.3 billion. Operating profit increased by 13.1% year-over-year to NT$30.5 billion. And the net income increased by 33.5% year-over-year to NT$26.4 billion. The growth was mainly due to the decreased personnel expenses, earnings from subsidiaries and the decreased anticipated tax expense.

Next slide, on slide 8, we show quarterly figures under US GAAP. For second quarter '07, revenue increased by a 9.2% year-over-year. EBITDA increased by 2.7%. The operating profit and the net income increased by 6.8% and a 46.1%, respectively, primarily, due to the aforementioned reasons.

On slide 9, we take look at our individual business units. I will review net performance under US GAAP. Internet revenue and the data revenues increased year-over-year by 7.6% and 8.2%, respectively. Internet revenue benefited from increased broadband subscriber number and a successful initiative to upgrade customers to higher speed ADSL and FTTB services.

Mobile revenues increased by 1.5%. This was driven by the 3.7% growth in postpaid subscriber, and 18% growth in VAS which is the value-added service revenue year-over-year.

In the fixed-line business, local revenues decreased by 4.1% year-over-year, mainly due to mobile and broadband substitution. Domestic long distance revenues decreased by 8.2% year-over-year due to mobile substitution and the VoIP. International long-distance revenues increased by 4.2% when compared to first half of 2006, due to the sale of international prepaid cardsespecially to South East neighbors, and the increase in wholesale revenues. Business segment revenues based on ROC GAAP are also presented on the right hand side of this page for your reference.

Please move on to slide 10 for the quarter results. The second quarter Internet revenues were NT$9.3 billion, a 6.5% increase year-over-year. Data revenue was NT$2.8 billion. Revenues for the mobile business increased by 2.2% to NT$18.7 billion, and the fixed-line revenues decreased by 2.1% year-over-year.

On slide 11, under US GAAP, the total operating costs and expenses for first half 2007 increased by 2.3% year-over-year, which was mainly due to the NT$3.6 billion increase in costs and expenses from our subsidiaries. However, the increase was partially mitigated by the 10.5% decrease in personnel expenses and the 23.9% decrease in handset subsidies year-over-year, owing to the headcount reduction and the least competitive environment. Depreciation and amortization expenses also decreased NT$0.6 billion, representing a 3% decline year-over-year, this will affect our capital expenditure reduction which began in 2002. On the right hand side of slide, we have provided data under ROC GAAP for your reference.

On slide 12, for the second quarter operating costs and expenses increased by 10.3% year-over-year, mainly due to the consolidation of operating expenses and the costs of NT$3.6 billion from the newly acquired SENAO Corporation.

Now, I want to talk about our capital expenditure. The capital expenditure for first half 2007 decreased by 18.9% over first half 2006. This was due to the decline in spending, in all mobile division by NT$3.1 billion. Going forward our CapEx may increase due to investments focused on our core business and our effort to migrate mobile and the data customers to higher revenue platforms, including FTTx, IP-based NGN, 3G, 3.5G systems and xDSL.

Now, I'd like to handover to our President, Lu, for business reviews.

Dr. Shyue-Ching Lu - President

Okay. Thank you, Dr. Shieh, our CFO. Now, lets move on to our business review. Please refer to page 15.

Chunghwa Telecom's total revenue for the first half '07 was NT$96.4 billion, an increase of 5.5% compared to the first half of 2006. The growth in mobile and Internet data contributed about 1.9% while the revenue from our subsidiary contributed about 3.6% out of the 5.5% growth.

On the left hand side of this page, the pie-chart shows our revenue breakdown in the first half of '07. As you can see the percentage of other revenue increased to 5% due to the inclusion of revenue from our subsidiary; SENAO. Fixed-line revenue was 31%, mobile revenue 38% and Internet/data 26%.

As the only integrated telecom service provider in Taiwan we continued to be the dominant player in the fixed, mobile and Internet/data markets.

On Internet/data as shown on slide 16, through the first half of '07, we had 4.2 million broadband subscribers with 66.3% of those customers opting for service speeds higher than 2 megabits per second. Our broadband access revenue for the first half of '07 reached roughly about NT$10 billion, up about 7% compared to the first half of '06. We expect this growth trend to continue, reflecting our successful efforts to promote our broadband services.

Slide 17 shows our efforts to transition customers to higher access speeds under the progress of our fiber deployment. At the end of June '07, we had more and 1 million broadband subscribers with a service speed of at least 8 megabits per second, representing 24.9% of our total broadband subscribers. We continue to increase our fiber penetration rate by deploying our fiber networks in residential buildings, campuses, and the commercial buildings. Hallmark [ph] opportunities to access and adapt a variety of Internet value-added services. In addition, I would like to emphasize that of the 14,000 plus commercial buildings we serve, we have about 90% of the market share. At the end of June '07, we had 315,000 fiber-to-the-X subscribers.

Now, I would like to move on to our Mobile business on slide 18. Chunghwa Telecom has maintained its number one mobile market share position. At the end of June '07, we had 8.6 million mobile subscribers, including 1.68 million 3G customers. Obviously the number of 3G subscribers as a percentage of total mobile subscribers base keeps increasing. During the past year we have seen successful mobile value-added service growth led by our exclusive mobile value-added service platform emome. Among these services, total VAS under mobile Internet exhibited 18% and 23.4% year-over-year growth, respectively. Therefore, total revenue as a percentage of mobile revenue increased to 6.5% in the first half of '07.

Moving on to slide 19, as previously mentioned, our 3G deployment has proven to be successful. We had 1.68 million 3G subscribers at the end of the first half of '07, of which 45% utilize 3G handsets. 3G ARPU was 58% higher than 2G APRU. We launched HSDPA handsets last year, the CHT 9000 series of handsets has mobile office functionality, like push-email, a calendar, a to-do list and the so on. So far we have 44,000 total CHT 9000 series customers and the APRU for these customers reached NT$1,520, of which 28.7% is from VAS.

The strategic alliances with other renowned vendors we will continue to roll out more new customized models to provide customers with additional choices.

Finally on fixed-line, on slide 20. On left hand side of this slide, please note how fixed-line value-added services, like our ringback tones, increased significantly over the last several months. Through the end of this July, we had 465,300 fixed-line ringback tone customers, compared to 56,000 at the end of last year.

On the right hand side of this page you can the payoff of our continues effort to maintain our fixed-line market share. I would like to highlight that for ILD our market share was 61% at the end of June '07. As an incumbent we did a good job defending our fixed-line market share and I am confident that our strong market position will continue in the future.

Now, turning to quality telecom service provider, Chunghwa is in a very good position to offer bundled solutions.

And please refer to page 21. For enterprise customers, we provide customized solutions such as VPN and ICT, as well as include the network services. Furthermore, we also bundle our broadband and mobile service in order to form a seamless telecommunication network. For individuals and the families we offer broadband plus MOD services, consolidated invoices, store value cards for all services, Friends & Family service and mobile Energy Plan with objective rates. The total use of subscribers of Friends & Family grew 10.9% year-over-year. Operating results of Energy Plan were also outstanding with ARPU reaching NT$1,406 and subscribers growing 9.2% quarter-over-quarter.

By the end of June '07, there were 333,000 MOD subscribers compared to 157,000 a year ago. We have also been working hard on content side. Usually, baseball has had about 750,000 hits on our platforms, namely MOD, 3G, and hiChannel. Since the online launch at the end of April this year, it also has brought in new ad revenue for the Company. That's all for our business review.

Before I hand it over to Chairman for the strategic highlight, I will give some regulatory updates for your information. So, please refer to Page 22. I would like to update you with the current status of the new tariff set in regulations, our MOD open platform, local loop and bundling co-location, fixed to mobile call pricing rate and WiMAX messaging.

Regarding to new tariff setting, the NCC resolved to reduce telecom tariff in December last year. For fixed-line we cannot charge the indoor wiring maintenance fee by default. For the mobile business, tariffs for 2G services, including fixed to mobile call, prepaid service and the service to exit was the highest rate, each regulated to decrease by a range of 4.88% to 5.2%. For ADSL access service, we are mandated to reduce tariff by 5.4% and not allow to bundle ADSL with local service.

On our MOD to open platform was certified by NCC on January 30th of this year. Compliant with NCC's regulation, MOD is now deemed to be a telecom service. We expect to have more channel aggregators to join in and provide diversified contents. Local loop was classified as a bottleneck facility in December 2006, and the cost base rental fees are yet to be come in by regulator.

We are obligated to co-locate with our tentative operators if there is enough capacity. Currently 13 call switch are co-located with alternative fixed-line operators and another 13 who is mobile operators.

Pricing rights for fixed to mobile costs are expected to revert back to the fixed-line operators by April 1st, 2010; according to NCC's announcement. Our bid for the WiMAX license issued on July 26th was unsuccessful. However, we are considering taking part in the iDEN-wide licensing in about two years.

Now, I would like to hand it over to Chairman, Ho Chen, for our strategic outlook.

Tan Ho Chen - Chairman and Chief Executive Officer

Thank you President, Lu. In conclusion, I believe our strategy is quite clear. Let us highlight the key aspects of our near-term strategy on slide 24 and 25.

First, in our core businesses. We will speed the adoption of our 3G NOVIAS [ph] and will expand HSDPA coverage to attract more mobile Internet users. We intend to continue to grow our broadband subscribers base by migrating high end customers to fiber. We also developed a new application service to create new revenue stream. In the near future, we will start to offer 50 mega and a 100 mega FTTB services, via launching chain fixed videophone and e-watching services. Furthermore, we will strengthen our data-mining capability to offer tailored service to select customer segments. The customer service structure was reorganized in the first half 2007 to enhance service quality. We will also offer rewarding plan across our major businesses to increase customers' loyalty and will reinforce the e-invoice service to save cost.

Second, we are promoting convergence to compound those service offerings, including integrated enterprise solutions and mobile plus fixed, mobile plus broadband and digital home bundle services.

Third, we have streamlined some of our operations. The Company consolidated our Central and the Southern Taiwan business groups to enhance operating efficiency in the first quarter. In addition, we set up the Enterprise Business Group to boost our capability of ICT customer total solutions. Recently, our Board resolved to establish Property Development & Management subsidiary to operate real estate business with specialty and efficiency. The Company is expected to operate by the end of this year.

Fourth, on M&A, we acquired 35... 31.5% ownership of SENAO in January 2007 to enhance business channels and distribution capabilities, especially for handsets. Their exclusive service stores are expected to compliment Chunghwa service hours and enhance sales to our younger target demographics. Additionally, we acquired Elta to enrich video content and value-added service. Major League Baseball Games are of the key additions from Elta.

Next page.

Fifth, business alliance; we are now developing MSN and digital home services with Microsoft. We have cooperated with Google for applications such as map, mail, browsing and search engine on ISP and mobile phones. We are also forming a co-marketing alliance with CafÈ, Financials to attract more customers.

Sixth, we will continue to focus on driving cost savings. Besides personnel savings, we will examine our equipment investment and utilizations carefully in order to control related depreciation expenses. We'll also control marketing costs, especially handset subsidies.

On the cash investment and management side, we are now strengthening our existing risk management framework and building our in-house expertise.

We adopt a managing the managers approach, to develop in-house capability of cash investments and asset allocation. We are trying to optimize yield by extending the duration of our investment that are not required to meet our short-term cash needs. We will add higher yield instruments to our investment portfolio, and steadily move a great amount of our investment offshore in order to improve yield, spread risk and broaden our asset diversification.

Finally, we remained fully commit to maximizing value for our shareholders. We intend to continue to maintain our high dividend payout policy. We will continue exploring opportunities to enhance shareholders' returns through capital management. Although, contribution from property revitalization is still small, we expect it to grow, and we will make best use of those assets to enhance returns to our shareholders.

That concludes my presentation. We are happy to take your questions. Operator, please.

Question And Answer

Operator

Now, we are going to the question-and-answer session. [Operator Instructions]. Hi you are on the line; go ahead please.

Anand Ramachandran - Citigroup

Yes. Hi, can you hear me?

Operator

Yes please.

Anand Ramachandran - Citigroup

Thank you. Good evening. My name is Anand Ramachandran calling from Citigroup. Thank you so much for the call and congratulations on the good numbers. Three questions to start off with. Firstly, if I look at slide number 4 which is the employee expenses, could I just confirm you expect... if I take out the ERP costs something like 35.8 billion in total employee expenses this year and obviously a much lower number next year, and this is the total employee expenses including whatever new employees you plan to hire. And a follow on from that would be, if I look at your first half results and then these personnel expense guidance, are you still maintaining your full year profit estimate of NT$45 billion and change? So, that's question number one.

Question two would be on the dividend payout, given the share buyback announcement we should expect that the payout proportion will probably fall, just like last year, would that be a reasonable assumption?

And the third question I wanted to check with you was on the depreciation, should we expect it to probably rise into the second half, given you expect CapEx to rise or should we expect the current rate to stay the way it is? Thank you.

Joseph Shieh - Chief Financial Officer and Senior Vice President

Okay. Yes, thank you. We anticipate the total human resource cost including our salary and pension and bonus, etcetera, probably we are quite already slightly reduced decline for next few years; and about the dividend payout ratio, as you know we just launched a buyback program recently. And we try to maintain the equity pattern and also maintain the stable dividend ratio for our shareholder. But actually we need to see... how actually [ph] does that come out by the end of this repurchase program. So, but I can say again here that we try to maintain a dividend payout ratio as stable as possible. About the third one, the depreciation [indiscernible]

Dr. Shyue-Ching Lu - President

You mentioned of all the impact of share buyback on the dividend payout for next year, for this year our estimate for the timetable of all the events related to this share buyback... as we mentioned the repurchase shares would be bid registered six months and the... we estimate that the timing for this bid registration will occur next year, so that the impact on our dividend payout will be the result... operating results of next year. Okay, so that will be disputed in year after, yes. And since the, as soon as we announced, the size of the repurchase program is certainly not through what we had conducted last year. This reasonable estimate of the percentage of shares repurchased. The impact on dividend payout will be roughly the same, as what we had last year.

On the depreciation, well, although the CapEx for this year, we forecast to be about NT$30 billion slightly higher than what we spend last year, because of the... all this depreciation policy, the impact of this... very recent growth in... or increase in CapEx will not... is significant that affect depreciation for this year. So, we believe, as I mentioned earlier, several times during the past, depreciation will fall about at least 1 billion per year for the coming years. So, we are confident to say that the depreciation for this year would be about one period less than what we had last year. And the second part of your first question is on the guideline we offer in April.

Anand Ramachandran - Citigroup

That's right. I mean after first half, do you think that's too conservative?

Dr. Shyue-Ching Lu - President

Well, the results of the first half is better than we anticipated. So, this kind of development, that we are slightly more optimistic for the second half of this year. So, we believe from today's standpoint of view, the results for the second half could be better than what we reported in the guidelines. Yes, and we can be a little bit optimistic, we will be better than guidance offered in April.

Tan Ho Chen - Chairman and Chief Executive Officer

We will not say ourselves as conservative, I will say thank you for moderate regulators. Thank you.

Anand Ramachandran - Citigroup

Thank you so much.

Operator

The next question; you are on the line. Go ahead please.

Unidentified Analyst

Hello.

Operator

Yes please go ahead.

Unidentified Analyst

Hi, this is Jimmy Chung [ph] of JP Morgan. Just four quick questions; first is on your international long distance revenue line... performed very well in the second quarter... if I divide the total ILD revenue by up/down minutes... directly [ph] per minute, there has been declining, quarter-on-quarter for the last few quarters, but spiked up recently, in the second quarter of '07. Is there any reason for this? I know you said you are selling more international prepaid in wholesale revenues; but I was just wondering if there was any other reason for this deployment?

The second question relates to the cost, particularly handset subsidies and personnel. You said that handset subsidies fell 24% and personnel fell 10%. Can you give us the actual handset subsidy costs and the actual personnel expenses cost for the first half of '07?

And the third question is on the pricing rise, fixed to mobile cost which you say, may revert back to fixed-line operators by 2010. Does the NCC still require your fixed-line market share to fall materially, say to about 80%, if this is to happen. And if it does occur, how much positive contribution would you see it to have on your revenue line?

And the final question is, what is the average ARPU for MOD service in the first half of '07? Thank you very much.

Dr. Shyue-Ching Lu - President

Let me answer your question from backwards, the average revenue for MOD is still up the learning curve stage... I would... let me put it this way, because we are in the stage of transitioning from use to be regulated according to the cable TV law but now we are converting our platform to be an open platform and to be regulated by Telecom Laws. The ARPU for the first half of this year, MOD, is about NT$87.

The pricing rate for fixed to mobile calls; as we reported, NCC has announced that it is going to take into effect April 1st of 2010. We believe the requirement for this is no longer... it used to be... they used to say that the fixed line... this market share should fall below a certain percent before they will consider such a new policy. We... from all our understanding there is no such prerequisite for this in our new policy.

And new handset subsidy; for the first half of this year, the actual... the total number is about NT$23.8 billion... NT$2.3 billion, NT$2.4 billion; and this is later reduced, being reduced about 24% from the same period last year. and I missed the ILDs, that is on ILD... the reason that we performed quite well on ILP because of the effort we put on the wholesale, you know, marketing and the volume on wholesale increased significantly during this period.

Unidentified Analyst

And just a final follow-up on...

Dr. Shyue-Ching Lu - President

And all the prepaid card ILDs revenues, the prepaid card increased about 30%, wholesale increased about 20%.

Unidentified Analyst

And just a final figure on the personnel expense charge for the first half of this year?

Unidentified Company Representative

Jimmy, the personnel expense for the first half of this year was NT$18.7 billion.

Unidentified Analyst

Okay thank you very much.

Operator

The following question is from Lehman Brothers. You are on the line, go ahead please.

Danny Chu - Lehman Brothers

Hi. This is Dan Chu from Lehman Brothers. I got two questions. First is, can you talk a little bit about the indication of this establishment of the property development and management subsidiary, is it down the road that we should expect that this unit will be separately listed in order to crystallize the value?

And then the second question is, on the share buyback, is there indication that we should draw upon this share buyback, will it have any impact or implication for the possibility of another capital reduction next year. And then finally, can management talk about with regards to the new store that Chunghwa may invest in to win that market. Can the management comment on that as well? Thank you.

Joseph Shieh - Chief Financial Officer and Senior Vice President

Yes, I think our Board has approved the formation of our new property and development completion and our agenda is that by the end of this year, hopefully, but no later than the first quarter of next year, we are going to form such new subsidiaries, by then. And we are going hire professional team to join this year. And we will more focus on business model. The way we are operating this new subsidiary will be more, let's say we are creative to our expertise on the digital home and we also more emphasize on the... and by vendor partition. The started... or this year the discipline [ph] and we will be... we are waiting for a new management team to join us.

About the share buyback, and as we mentioned the share buyback, the impact to our cash dividend... EBITDA, the impact... the cash... the impact will be effective on the year 2008. And pursuing the capital management is our continued goal and so we... this year, we have done two approaches, one is the transferred the capital surplus to capital stock. And now we found the capital market position is appropriate. So, we don't just buyback program. And the better approach [ph] is... everything is, it seems that we see cautiously and seriously looking for, obviously, the investment and then our approach is, I think we looking for... actually, we have one potential partner to form the joint venture related to the ITC project, Internet Data Center, which is although also our core business. And hopefully, we can have more solid play or maybe we have can develop a new entity by the end of this year.

Danny Chu - Lehman Brothers

So, just to follow-up on that is, for the property manage... development and management subsidiaries, should I expect, say within the next 12 to 24 months, it will still be a hybrid unit under Chunghwa or going forward there is plan within the Company to separately list that unit?

Dr. Shyue-Ching Lu - President

You are talking about out new subsidiary property in the price line [ph]?

Danny Chu - Lehman Brothers

Newly formed property, development and management subsidiary?

Dr. Shyue-Ching Lu - President

Yes. I think we do have the medium plan for listing of these new subsidiaries. But at the initial stage, we are going to only present wholly-owned on these entities. And we expect for first year probably, we are not going to accrue the profit from this subsidiary, but hopefully for the following... second or third years we can realize some details on these investments. And for the long term goal, our internal rate of return for this investment. We anticipate about 7.5 internal rate of return for the next five years.

Danny Chu - Lehman Brothers

Thank you.

Operator

Your following question is from Ellen [ph]. You are on the line; go ahead please.

Unidentified Analyst

Hi. This is Franklyn Foo [ph], I'm calling from Morgan Stanley. The only question I have is, you have seen quite a significant growth in other revenue. Can you just walk through us, what is driving that growth and give us some outlook for second half?

Joseph Shieh - Chief Financial Officer and Senior Vice President

Well, the other revenue... majority of the growth in other revenue comes from the subsidiaries now. Because of the business on handset sale and there is a comfortable... more than about NT$3.132 billion a year.

Unidentified Analyst

So, going forward would that be roughly the same amount that you guys can generate in second half or going into 2008?

Joseph Shieh - Chief Financial Officer and Senior Vice President

Exactly, it to be the same number for the second half or could be a better number and we should track more our revenue and the profits from them now going forward.

Unidentified Analyst

Sure. And what's the roughly the profit for the also SENAO?

Joseph Shieh - Chief Financial Officer and Senior Vice President

Well, SENAO been in the channel distribution in our business. The profitability of this company, I believe, is not different from [ph] SENAO Telecom. But it's really... in the value chain is up. We should explore and we will enhance our operation. We will give you the year financial results maybe later.

Unidentified Analyst

Okay. Thanks.

Operator

Your following question is from Goldman Sachs. Now you are on the line; go ahead please.

Cathy Chan - Goldman Sachs

Hi, I am Cathy Chan from Goldman Sachs. Thanks for the call. I have four questions. Firstly, regarding your ADSL access revenue trend, it looks to be declining by about 5% to 6% year-on-year starting in May of this year. Can you elaborate, what the reason for this is? Is it purely from the price cap that was implemented?

The second question is on CapEx? How come the mobile CapEx dropped so much in the first half? And as your maintaining your total CapEx guidance for this year at 30 billion than is there updated on number for the mobile CapEx, is that been allocated somewhere else?

The third question is on marketing expense, it looked to be relatively low in the second quarter, can you provide outlook for the second half? Can you expect some seasonally higher spending ahead of the quarter? And then the last question is on the capital management side, in the prepared statement that you commented that, you are still negotiating with the regulator to increase the limit on transferring the capital surplus, the capital stock. Can you give us some more details on exactly where this progress is and is there any chance that we can see a conclusion within this year or within the next 12 months? Specially given the political calendar in sort of the January-March timeframe? Thanks.

Joseph Shieh - Chief Financial Officer and Senior Vice President

Your first question is on the ADSL revenue, is that right? The difference?

Cathy Chan - Goldman Sachs

Yes, the ADSL access revenue, it looks to be declining about 5% to 6% year-on-year, starting in May of this year?

Joseph Shieh - Chief Financial Officer and Senior Vice President

Well, you know the reason is very simple. Because we are migrating our valued ADSL customers to fiber solutions. That's the main reason and revenue from fiber solutions in FTTx increased greatly as compared with the decline in ADSL. And the CapEx for mobile, we budgeted this year to about NT$6.3 billion and we have spent about NT$1 billion so far, and the remaining amount will be spent in the second half of this year, and sometimes it's because of the payment schedule are associated with the acceptance pace in all these installations.

The CapEx for this year, as we had mentioned before it is about 30 billion, we have no revision on this spending.

The marketing expense, going forward for the second half, probably the same as we have spent on the first half, and because we control our handset subsidy very carefully. And as we just mentioned 24% decrease as compared with the same period last year. So, we expect the marketing expense to be declining for the whole year.

About the last question... about capital management. We continue to negotiate with the regulator about 10% cap. The Chunghwa Telecom, our capital surplus count is very unique case among the Taiwanese companies. Not many... only I can say, only few... very, very few company has risk problem. We have huge capital surplus in relation to our remaining account or equity accounts. And we talked to the FFC and we petition, they can... of the 10% cap under the circumstances, for instance, you reconsider we are a company which was a state own companies and then become private companies and also reconsider, that really the Company have the long into the major merger acquisition activity. And these two cases, client is talking about the... really, the case like merger and acquisition or there's a case of major organization change and due to the regulation change, we can... we petition for FFC can lift up the 10% cap. But so far, we haven't get a final answer yet. But we really understand that FCC is seriously clear participation and they also have already send out a survey to all of... some major of this companies and they also get feedback. So, I think, we feel, we got a positive attitude from FFC. But we haven't got a final answer, yet we will closely watch these possibilities.

Cathy Chan - Goldman Sachs

Thank you.

Operator

The following question is from CLSA. Now, you are on the line; go ahead please.

Elinor Leung - CLSA

Hi, thank you. This is Elinor Leung from CLSA. I have three question. And the first one is that asset, the current share buyback, how much room can you buyback the share given the 49% for your shareholder limits on your company?

And the second question is that you expect to start seeing property contribution in 2009 which is the second year of your establishment of your property subsidiary. What do you expect the contribution in terms of revenues in 2009 or 2010? And the third question is that you have complete your early retirement program. Are you continue to reduce any staff to lower your personnel expense in the future?

Dr. Shyue-Ching Lu - President

Yes, I think the, since the our 2P financial holding already reduced to close to 41% maybe even below 41%. Actually we have learned to buyback more shares. Especially we have... we are capturing rich company, so buyback share and kinds of [ph] share I think for the benefit of our shareholders. Which they have learned but we have considered that capital market conditions. So, at this stage, we are seeing the 2.35% of our share outstanding buyback is appropriate. But I am not sure whether we can fully buyback this amount or not. Because we really has to consider the total market conditions.

But definitely in the near future, if the market permitted, we may consider that. The question is for our new property entities. We... as I mentioned earlier, we anticipate that we may have the return from these entities. And actually I cannot give you exact number at this moment, but I would anticipate, the return is still minimal compared to our core business. So, I will say eventually stay minimize. I cannot give you a number right now. But we anticipate, there were positive return from year 2009. Your third question is about our ERP, I think, that we have already completed, obviously, headcount reduction program.

And actually... naturally every year we have people apply for retirement. But so far we don't have any plan on hand about further early retirement program although we fear that current headcount about 24,000 or 25,000 employee is appropriate number for us at this moment. Thank you.

Tan Ho Chen - Chairman and Chief Executive Officer

Let me add a little bit on the personnel issue. As Lu mentioned before that we had this 3,000 reduction in headcount reduction in three years. And from the presentation, we had earlier that 4,500 took in the ERP program and we hire during this period about 1,500. So, really, we are achieving this net deduction of 3,000 in three years. And the actual number of employees today as Dr. Shyue mentioned, is about 24,000. This figure is below the figure I always mentioned is 25,000. So, it's already below the target we set before, at 25,000. So, our Chairman has asked the management to view our personnel requirements. And we are at the stage of doing this homework and if we have some more concrete programs to be... to consider, we would let you know.

Elinor Leung - CLSA

Thank you. Regarding the property, when do you think, you will see meaningful revenue contribution from the property?

Tan Ho Chen - Chairman and Chief Executive Officer

This year or 2009... you mentioned about 2009 or 2010, we would have 10 multi-tail premium for this Company in the coming months. And so when we establish this business plan in quite detail and when we announce this establishment of certain enterprise we will perhaps have better idea to tell you here.

Dr. Shyue-Ching Lu - President

I will say, when you say meaningful by year 2009. I will define the meaningful as the positive income to the Company certainly, maybe not a sizeable, in terms of our total revenue. Thank you.

Elinor Leung - CLSA

Okay. Thank you.

Operator

[Operator Instructions]. Now you are on the line; go ahead please. Hello, hello. Please go ahead.

John Kim - Merrill Lynch

Hello. Am I on the line?

Operator

Hi, please, go ahead sir.

John Kim - Merrill Lynch

Hi. Can you hear me. If you can... this is Johnny Kim from Merrill Lynch. Would you please give us some update on your progress regarding to your talk with the channel provider of your IPTV services. Say how many channels have you able... have you been able to secure and what kind of investing fee can we be expecting. And my number two question is that, is it correct to assume that you will be... you would not be aggressively marketing your IPTV services but treating it mainly, as a mean to enhance your customer loyalty? Thank you.

Dr. Shyue-Ching Lu - President

This is a very good question, for MOD or IPTV operation. The first question relate to a very sensitive area, especially in Taiwan. So, we mentioned about, we have already made contact with content or program providers. And we believe we have made some progress. But I am sorry this is not a great time for us to discuss any specific information about such context or results. And it's materialized with regulators approval, we certainly... everybody knows to what extent that we are able to enhance our content and programs. And further, we would market MOD services definitely this is an area for our future; it's probably a multiple player... very essential part of all this broadband applications. So, we will, of course, make this good use of this to retain our customers but also to gain customers making use of our service.

John Kim - Merrill Lynch

Thank you.

Operator

Now, we take the last question. You are on the line; go ahead please. Hello? Yes please go ahead.

Unidentified Analyst

It's Jimmy Chung [ph] with JP Morgan. Just two quick follow-ups, one is that do you have any guidance for this full year tax rate under US GAAP or the tax rate or the tax expense. And the second is, what's your strategy for WiMAX given that you didn't win one of their licenses awarded last month? Thank you.

Dr. Shyue-Ching Lu - President

Let me take these two questions. The first one is on the effective tax rate. Let me advice you that please refer to the tax rate for under ROC GAAP which is about 20.2% to 23.3% for the first half of this year. And going forward for the whole year you may assume 20.5% to 21% effective tax rate for this year. And our strategy or what we think about WiMAX. WiMAX is a technology... new technology and it is still developing. And from our understanding the system or handsets terminals associated with this new technology, probably will be ready some time in next year or even later. The service is offered through this new technology are available from Chunghwa Telecom today. So we keep emphasizing or make this clear to our customers that if you need any service Chunghwa Telecom, we can offer to you now at reasonable price. And we mentioned that... in two years, if the government is going to issue new licenses covering the entire region, we are considering to participate. And furthermore for those who have received... awarded the license for WiMAX, some of them have already come to us and see if we can be of help to them or collaborate with them.

And the Company... we have participated in some of the so called, in Taiwan, WiMAX projects. And we are committed to finish and to comply with all the requirements from... under this projects. So, we are ready to make dynamic growth, we are flexible in pursuing all business as well as pursuing some new opportunities with others.

Unidentified Analyst

Great. Thank you very much.

Dr. Shyue-Ching Lu - President

Okay. Thank you.

Operator

Now, I will turn back over to Chairman, Ho Chen. Please.

Tan Ho Chen - Chairman and Chief Executive Officer

Thank you. Good night, everybody.

Operator

Thank you Chairman, Ho Chen. That's all for today, conference call. Replay detail will be available on CHT website at httpwww.cht.com.tw. We will like to thank you all for the time. And thank you for your using Chunghwa Telecom audio conference service. You may now disconnect your line. Good night.

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